Tax Question for Insurance Indemnity Payments

Dear Art,

I am a crop insurance agent in central Iowa and due to the drought will have approximately 100 farmers who will receive claim settlements on their soybeans this year. My question is, are they allowed to defer those proceeds as income until 2004 even if they receive the payment in 2003? I have been given different answers such as yes, no, or yes only if the farmer normally markets his\her grain in the spring. I would appreciate your opinion. Thanks

Insurance agent

Dear Insurance agent,

I do not know the answer to your question but that is a good question that a lot farmers will face. I will send the question on to Roger McEowen, an attorney and ag law expert, who works on tax issues.

ART

Dear Insurance agent/ Art,

Proceeds from insurance on growing crops are includible in gross income in the year actually or constructively received. But, under a special provision, taxpayers on the cash method of accounting may elect to include crop insurance and disaster payments in the taxable year following the year of crop loss, if under the taxpayer's practice, income from the sale of the crop would have been reported in the later year. I.R.C. Sec. 451(d). If both crop insurance and disaster payments are received they must be treated the same if received in the same year.

The deferral provision applies to federal payments received for drought, flood or any other natural disaster.

The election is made by attaching a separate signed statement to the return for the tax year of damage or destruction or an amended return.

Agreements with insurance companies that provide for payments without regard to actual losses of the insured do not constitute insurance payments for the destruction of or damage to crops and do not qualify for deferral.

Roger A. McEowen

Associate Professor

Ag Law

Kansas State University